Greetings and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Geoff High, Vice President of Investor Relations. Thank you, you may begin..

Hello and welcome to DMC's Third Quarter Conference call. Presenting today are DMC's Executive Chairman, James O'Leary, CEO, Michael Kuta, and CFO, Eric Walter.

I'd like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections, and assumptions as of today's date, and are subject to risks and uncertainties that are disclosed in our filings with the SEC.

Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our forward-looking statements. DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events.

Today's earnings release and a related presentation on our Third Quarter performance are available on the Investors page of our website, located at dmcglobal.com. A webcast replay of today's presentation will be available at our website shortly after the conclusion of this call. And with that, I'll now turn the call over to Jim O'Leary.

Jim?.

Thank you, Geff, and thanks to everybody for joining us today. I've been on the board for a little under a year now. As Jeff mentioned, I was recently appointed as Executive Chairman. My first official board meeting was when the strategic process was announced. So I'm very familiar with all the activity associated with it.

And over the last few months, I've had an opportunity to engage with many of our shareholders, so I have a good sense for how you're feeling and what you're thinking. I've been associated with industrial building and manufacturing products businesses for about 40 years, most often serving as either the CEO or CFO of publicly traded companies.

My most relevant experience was with a publicly traded company called Kaydon Corporation, which was a diversified industrial manufacturer that went through a number of strategic assessments similar to what the MC has been dealing with over the past 10 months.

Ultimately, my board and I concluded that a sale to a strategic peer was the best outcome in what was a highly successful transaction at the time.

For the past 10 years, I've been a Director or Advisor to several publicly traded companies, including Builders First Source, the company's largest distributor of value-added building products and services. I've also worked in the private equity space, focused primarily on mid-cap industrial companies as either a Director, Advisor, or Executive.

As we announced two weeks ago, we've concluded the strategic review process on DynaEnergetics and NobelClad. The key takeaway is that we're not interested in selling excellent businesses for less than what we believe they're worth.

Dynaenergetics in particular was challenged by very choppy and volatile conditions in the oil field services space, and we concluded that now is not the right time to try to maximize the value of that business. I'll now turn it over to Michael for an update on the third quarter..

Thank you, Jim. DMC's third quarter sales were $152.4 million, down 11% from both the second quarter and last year's third quarter. The declines reflect weakness in the U.S. construction and energy services industries. Adjusted EBITDA attributable to DMC was $5.7 million, or approximately 4% of sales.

As previously reported, adjusted EBITDA reflects about $5 million in bad debt and inventory charges at DynaEnergetics and lower fixed cost absorption at both Arcadia and DynaEnergetics.

Arcadia, our architectural building products business, reported third quarter sales of $57.8 million, down 17% sequentially and down 19% versus the third quarter last year. Arcadia's third quarter Adjusted EBITDA margin was 5.8%, down from 17.8% in the second quarter and 18.8% year over year.

The decline principally reflects lower fixed cost absorption on reduced sales. Persistently high interest rates have negatively affected sales to Arcadia's high end luxury home market and also slowed commercial construction activity in several Arcadia's regional markets.

Arcadia's third quarter is also impacted by supply chain disruptions that limited product availability. We recently named Chris Scocos as our new Interim President at Arcadia. He brings an extensive background in lean manufacturing, operational excellence and improving plant productivity.

His immediate focus is on strengthening sourcing and supply chain functions, improving sales inventory and operations planning processes and more effectively leveraging Arcadia's ERP system. We also are reviewing certain product lines that have not consistently met our profitability targets.

DynaEnergetics, our energy products business, reported third quarter sales of $69.7 million, down 9% sequentially and down 5% versus last year's third quarter. Dyna's adjusted EBITDA in the third quarter was roughly breakeven and adjusted EBITDA margin was just under 1%.

The results included the previously mentioned $5 million in bad debt and inventory charges, as well as lower margin customer mix and the continued decline in U.S. onshore well completions. According to the EIA, completions were down 6% sequentially and were off 13% versus the third quarter last year.

Dyna is implementing several margin improvement initiatives and has completed the first phase of automating its DynaStage assembly operations in Blum, Texas. Phase two is scheduled for completion early next year. The next generation version of Dyna's flagship DynaStage system is also expected enhanced margins beginning in early 2025.

Sales at NobelClad, our composite metals business, were $24.9 million, flat versus the second quarter and down 10% year over year. Adjusted EBITDA margin improved to 23.2%, reflecting a favorable project mix. NobelClad ended the third quarter with an order backlog of $59 million versus 63.9 million at the end of the second quarter.

Rolling 12-month bookings were $103.9 million and book-to-bill ratio was 0.96. Now I'll turn the call over to Eric for some additional financial information and a look at guidance.

Eric?.

Thanks, Michael. Third quarter SG&A was $28 million or 18.5% of net sales compared with $29 million or 16.7% of sales in the third quarter last year. It's important to note that SG&A included approximately $3 million of bad debt charges at Dyna. Excluding these charges, third quarter SG&A would have been approximately $25 million or 16.5% of net sales.

Third quarter adjusted net loss attributable to DMC was $9.6 million, while adjusted EPS attributable to DMC was negative $0.49. With respect to liquidity, we ended the third quarter with cash and cash equivalents of approximately $15 million.

Total debt inclusive of debt issuance costs was approximately $74 million and net debt was roughly $60 million. Our debt to adjusted EBITDA leverage ratio was 1.18, which remains well below our covenant threshold of 3.0. On a pro forma net debt basis after subtracting cash, our leverage ratio at the end of the third quarter was 0.96.

Given the significant volatility and uncertainty in our energy and construction markets, we've decided to limit our quarterly financial guidance to consolidated sales and adjusted EBITDA. For the fourth quarter, we expect consolidated sales to be in a range of $138 million to $148 million.

While adjusted EBITDA attributable to DMC is expected in a range of $5 million to $8 million. The expected sequential sales decline principally reflects the challenging market conditions and seasonality at DynaEnergetics and Arcadia.

The impact of high interest rates on luxury home sales and the related impact of lower fixed cost absorption in some of our factories, principally those supporting certain high-end residential products are expected to negatively impact Arcadia's fourth quarter performance. With that, we're ready to take any questions from our analysts.

Operator?.

Thank you. We will now be conducting a question and answer session. [Operator Instructions]. And our first question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question..

Thanks, good evening everybody..

Hi Steve..

Hi, how are you? So there's two things for me. The first is kind of big picture and the other one's more backward. I think at a high level, so we've seen a lot of turnover, right? At Arcadia, Dyna, the board.

And I'm trying to understand and maybe you could help how much of the change is related to either performance or the direction of the company or maybe how much of the performance is related to leadership versus the market.

I'm trying to kind of figure out is this market, is it leadership and is that why leadership is changing and/or leaving?.

Steven, this is Jim O'Leary. I'll answer that, nice to meet you. So the answer is yes, but I couldn't give you specific percentages. Let's start with the market. Absolutely, the market's played a lot to do with DynaEnergetics. We talked specifically about that as having a lot to do with why that process was halted.

And if you look at every one of peers, competitors, people in the space, particularly the much more noteworthy, the Schlumberger, Baker-Hughes, Halliburton, Break Holiday in the back half of the year. And if you look at this year, it really is a tale of two halves. First half of the year, not too terrible.

Second half, much more challenged, reliant a lot more on international business. So the market for Dyna should not be a surprise to anybody.

The market for Arcadia, and this is where when I said the answer is yes, is it leadership? Is it leadership from the absolute top down? We announced a couple of weeks ago that we wrote off $142 million of goodwill. That's not a rousing testament to we're doing a spectacular job and we know that.

The market conditions though, I'll tell you, and I spend, probably mention that most of my time as CEO has been in industrial products companies like DMC. Most of the time I spent in the last decade and probably over the last four decades is in the building space.

If you look at Gellwind [ph] numbers that were released today, if you look at the like for like businesses with Apogee, which is doing a great job on itself help initiatives.

But when you look at the businesses that are comparable to ours, no question, they're not really doing that much better, a little better, but the self-help initiatives on margin and some of the things that we're just starting, they are doing better on.

So I'd say the market has had a lot to do with it, but when you pay a lot for a business that hasn't performed as Arcadia has not, that's a reflection on us from the top down. Now, the leadership points that you made, the board got it. We made a change at the chairman level. We've had some retirements in the past couple of months.

And at Arcadia, we made a change and we put in a guy who is immensely qualified at all the things that when we talk about some of the self-help initiatives on supply chain, on lean manufacturing, on basic capacitization, Chris's background, the thing that caught my eye, I'm looking at him, was he spent probably most of his career at a company called Cooper Industries in the commercial lighting division.

In terms of manufacturing prowess and all the things that, to be candid, family company like Arcadia really didn't have a robust skill set at, that's the right guy to fill in a lot of those gaps right now. So as I said, answer is yes. Market had a lot to do with it.

You combine market with the fact we paid a very robust price at probably the top of the market for Arcadia. We're not hiding from that. I mean, that's why we wrote off $142 million of goodwill. And we've begun to make the changes that, I think in the prepared remarks I mentioned, I've been on the board for about 10 months.

I've gotten to know a lot of our major shareholders, know exactly what they're thinking, know what they expect from us. And our job is to do better..

Great. No, that's great color. I appreciate that answer. Thank you.

And the other one I had, and then I'll get back in line here, but the other one I had was, when we think about the fourth quarter, and I appreciate not wanting to break down into segments, but the domestic pressure pumping business and budget exhaustion, holidays, et cetera, everybody seems to be suggesting that's kind of like a low double digit decline in that business.

And I'm sort of trying to triangulate here, but I would think NobelClad flattish.

So is the rest of it Arcadia? Is that how we should be thinking about it, or is Dyna worse than that for other reasons I'm missing?.

I think Arcadia is the wild card. Maybe a narrative that we, and when I say we, in the building space, everybody thinks high end is insulated. High end is not insulated from anything. There's always a timing issue, but eventually interest rates catch up with even the high end custom niches. So we've been very conservative there.

We, and it's littered throughout the press release, but the discussion on residential, the discussion on factory absorption, when you are very project driven business, when you sell things that are very high priced, and they drop off, and I think until after the end, I don't want to, I haven't heard the Gellwind call yet, and I know other companies I'm associated with are going have their calls soon.

The election interest rates is a lot of uncertainty, probably more than I remember in recent, certainly in recent years, maybe in the recent decade, swirling around housing, which had a great bump from COVID, but now has been in a holding pattern for a while because of affordability.

I think I'm kind of rambling on, getting to the point of probably a disproportionate impact we should expect from Arcadia, and that's where we're focusing our efforts on getting it fixed..

And Stephen, Dyna is, I'd say following the market generally for your comments, so in that range..

Great. No, thank you. Thank you both. That's helpful..

You're welcome, Stephen, thanks..

Thank you. Our next question comes from the line of Gerry Sweeney with Roth Capital Partners LLC. Please proceed with your question..

Good afternoon, everyone. Thanks for taking my call..

Thank you..

Guys, I was hoping maybe to discuss a little bit more about the work they want to do at Arcadia and to improve operations.

And then as maybe a subset to that question, are the systems in place to manage that? You talked about the ERP explicitly leveraging that, but just curious if all the systems are in place and then to go into a little bit more detail and maybe where some of the low-hanging food is or what have you, and what's the path forward on that front?.

I'm going to turn it over to Mike on some of the specific initiatives that he and Chris have been initiating, accelerating, and I think pushing forward with the right skill sets for rarely the first time since the acquisition. A macro comment, which I think, again, we might have underestimated and certainly contributed to the goodwill write-off.

We bought a family business. We bought a family business that had excellent commercial people. They understood pricing, they understood their markets. They had the right titles, the right org charts, the right people that at first blush look like they'd be able to handle the amount of change that comes with being a public company.

And the digestion issues around ERP, putting in compliance around being a public company, making sure you've got not just people who have the title VP of supply chain, but actually know what that means, particularly in a post-COVID environment. We underestimated the challenges there. And a couple of, we took a few calls after our last press release.

And to me, these are things that are simple to diagnose, easy to spot, not really wildly difficult to fix if you have people with the right skill set, but take time. And putting the ERP system on with the aggressiveness of the implementation, dealing with upgrading people happens with every family company acquisition I've ever seen.

And really dealing with just the robustness of the systems and the people, exactly what you think in a family company. The answer was no, and that led to the write-off. We've spotted, diagnosed, have fixes in for all of them, takes a little bit of time.

You'd feel a lot better if it was at a time when elections behind us, whichever party puts in place is going help me put a little bit more wind in the sails of the housing market more broadly and construction. And interest rates being a little bit lower would help the high-end residential market.

But that said, while it would be nice to have the wind in our sails, we recognize we don't. So we've got initiatives underway that are very specifically targeted to some of the things we probably could have been a little bit more respectful from the get-go on.

Mike, you want to talk about some of the specific initiatives?.

Yes, Gerry, so a couple of things that we're working on with the team relate to supply chain and sourcing so we can do a better job on both supply chain sourcing and planning as well as S&OP processes. So one of the gaps we have there is demand planning and knowing what we need when we need it.

So that was, you know, some of my comments around the supply chain disruption. So we've got programs we're putting in place there, working on, you know, the other thing is there's some, there's the other item in the backend of our business is there's some improvements we can certainly make in our finishing operations.

So, and a lot of that gets to, you get your supply chain deep bottlenecked and you got to get scheduling right and finishing up. So a lot of work we're doing on that to improve lead times on time and in full deliveries to customers, making sure we've got the shelf stock with product, making progress, but a ways to go.

So there's good things happening, but it's going take some time as Jim mentioned to sort that out..

Got you.

And sort of maybe as a follow-up, how much of the headwind is maybe high-end residential being weak versus maybe there's bread and butter commercial business, I'm not sure exactly where that stands, versus even some operational blocking and tackling, you have to sort of fix that?.

I shouldn't guess, but I will, and then I'll let Mike correct me that. The absorption issues again, very high margin, high price product manufactured in batches and discreet factories, that has a lot to do with the shortfall. That comes back quickly, or we take other steps to remediate it. It has a disproportionate impact on EBITDA and gross margin.

And when you look at the contribution margins from that type of product, that really tells the story. And please don't ask what the contribution margins are. We don't want to get into the habit of giving that out, but disproportionately, it's probably the high-end residential piece.

Mike?.

Jim, I mean, you covered it exactly as it is..

Yes, absorption, given the factory footprint and where we've got product coming from and at what price points, absorption had a disproportionate impact on this quarter story in particular and our guidance, by the way..

One more per se on the high-end residential. Just curious, maybe in the past, and I could be wrong on this, was I was even under the impression, maybe there wasn't as much marketing or effort put behind building the backlog in the high-end residential. Obviously, I do get higher interest rates or higher interest rates, right? There's a cost there.

But how much is that -- is my viewpoint potentially correct or is some truth or validity to it that it's not only interest rates, but maybe even some focus on sales marketing and growing that business?.

Yes, Gerry, you're on the right thread. I think what happened to us several years ago is we built up a backlog in the 18-month range. And on the high-end residential, you got to be in a 16 to 20-week lead time.

So what happened, and we've talked about this before, is that until you take that backlog from 18 months to 16 to 20 weeks, customers, they're interested only in getting the orders they have, sitting out there and getting those fulfilled, and less interested in helping you to build a backlog through that process.

So we're definitely in a valley from that standpoint, and it's reflected, as Jim said, in our absorption on residential..

And Gerry, in a family business, and I work with a lot of sponsors, I've in past lives bought a lot of family businesses, there's a lot of things that look like they function absolutely pristinely until you stress test them.

And what Mike just described, when you start to have a hole in your order backlog, when you're not really, when customer service is in aging, getting the right data, there's a lot of really basic stuff that, as I said, easy to spot, I wouldn't say quick fixes, but easy fixes require the right people.

Some of these things, I think they would have caught us anyway, because of the interest rate environment. And remember, our business is really, really project driven. And every business that I see in the building space from the other things I do, if you're project driven right now, you got really tough times.

I don't know, again, I haven't seen gelled winds. I know a couple of the builders are coming out, but even at the very high end, if you think Toll Brothers is a high end builder, even they're buying down interest rates. The areas of building that are doing well tend to be where builders can buy down rates.

You've got robust commercial activity, which is a lot less robust than it was when we bought the company. And that coupled with the visibility in the system to see where you've got gaps in production, the project business is dropping off.

Are all things we've got to improve? Won't happen overnight, but we've got them diagnosed to a bringing in the right people..

Got it. That's it for me. I do appreciate the candidness, so thank you..

No, you're welcome. Thank you..

Thank you. Our next question comes from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your question..

Hey, good evening, guys. Thanks for taking the question..

Thank you..

Hey there. Maybe just to start off, maybe just provide a little bit of color on how the quarter progressed in Arcadia.

How quickly did the demand start to fall off there? Was this really kind of back end loaded in September? And then it'd be helpful to, if you could give us any sense on how the businesses are trending through October relative to September end?.

Yes, so Ken, I think the business through this last quarter, I think it's pretty fairly level in terms of the demand, the bookings and what we saw come across in shipments. So I'm not ready to talk details about Q4, but it was, we started to see it, we started to see that come across in the third quarter..

Okay. Maybe switching over to the restructuring actions you're taking. One, I thought there was already an ERP implementation already kind of in place at Arcadia.

So when you talk about the sourcing initiatives, just what's kind of involved with that? And is there any way to kind of size the cash cost that's going to be associated with some of these restructuring actions you're taking and how long you expect that payback to be?.

So these are additions. We haven't talked specifically about any restructuring, but certainly everything's on the table when you have results like we've had, but there's nothing that we're specifically announcing. All the additions are top grading, upgrading people. You're 100% correct.

We've talked about ERP in the past, but it certainly could have gone smoother and really holding people accountable and getting some additional resources are in. The cash costs, it's kind of part of doing business when you're top grading and adding people. Like in the case of Chris, Chris is replacing a guy that we let go who had a comparable salary.

So it's not a huge incremental cost that we'd put a payback on..

Okay, maybe I'll ask one more. Obviously we just put in some incremental paint capacity here in this past year.

And I'm curious if you think, obviously not well timed relative to the market that we were seeing, but is there a way to kind of help size how much of that over capacity was potentially an impact in this quarter? And how do you think about what are the first steps to try to kind of right size the revenue planning process from here?.

Yes, the paint capacity had nothing to do with the over capacity. That was all in the residential business where again, specific high price, high margin projects that are done in batch, all the absorption issues or most of the absorption issues were there. The paint capacity to the rest of my knowledge had nothing to do with it.

Mike?.

Yes, and what we did when we added a bit of capacity is through industrial engineering. That's the industry -- so the industrial engineering isn't creating absorption or capacity challenges at this time..

Got it, okay, that's very helpful. I appreciate it..

You're welcome, thank you..

Thank you. And we have reached the end of the question and answer session. I would now like to turn the floor back to Michael Kuta for closed remarks..

Thanks for joining everyone. Thanks for joining the call today, everyone. Look forward to talking to you next quarter. And just add one thing, Stephen asked a really good question at the beginning and it pointed, but deservedly pointed. We get the fact that not just the market, the goodwill issue is our issue, we own it.

Some of the turnover that Stephen appropriately pointed out is because of issues that we've taken ownership of. We've listened to our shareholders, we're taking action on and not hiding from, but obviously not proud of, but we're going to get these things fixed. We know we're here to get the share price up and to work for you guys.

And that's what we're committed to doing every day. So thanks for your patience..

And thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..